Do Elections impact the real estate and mortgage markets?
Election time produces different levels of emotions to the populace but does it impact the real estate and mortgage markets? In reality, after most November elections, the general driver of real estate market remains the existing health of the economy, the existing market conditions of the local market and the normal seasonal market conditions.
Health of the Economy
The current health of the economy is doing very well with a brisk 3%+ growth trend for over a year keeping things looking positive for the economy. A healthy economy allows for potential wage growth and employment growth – as evidenced by the very low US unemployment rate of 3.7%. With yesterday’s election, many had already expected the House to be won by the Democrats; therefore, there was not a jolt to the perception of what might happen next – economically speaking. One does not normally see radically economic policy changes after an election.
Local Market Conditions
Although each real estate market is different I will reference what Tucson is experiencing – though similar as in many areas around the country. Low inventory and higher home prices experienced prior to the election will continue – the continuation of low inventory and higher home prices experienced prior to the election.
Seasonal Market Conditions
In terms of the normal seasonal housing market conditions, there is generally less activity as the year winds down into the year-end holiday season. On a positive note for prospective home buyers, one may find more willing sellers as the prospective buyer pool shrinks during this time period – so being a buyer during this time could be viewed as an opportunity.
However, the current borrower buzz word in the mortgage industry is interest rates. Yes, interest rates have risen nearly 1.5% in the last 2+ years, but we need a quick review of how we got here. Since late 2008, the Federal Reserve kept the Fed Funds rate – the rate banks borrow money from each other’s excess reserves held by the Federal Reserve – artificially low (0%) for a long period of time. The Federal Reserve dropped the Fed Funds rate and then also implemented Quantitative Easing by, in essence, printing money and pumping it into the economy thru the sale and purchase of US bonds. By adding this liquidity, the intent was to spur the economy to reach a target of 2% growth. It took several many years and recently the economy has reached and now exceeded the desired growth – potential ramifications described below.
To better understand mortgage interest rates one needs to know there are a variety of influences, but the impact of two factors are near the top:
The Bond Market
The bond market has been impacted by a couple of factors:
- The success of the stock market has driven a significant portion of the investments into equities (stock market) and thereby required higher yields in the bond market (10 year bonds in particular) to attract investors;
- As mentioned before, the US Treasury was a big purchaser of the US bonds for many years during its role in keeping rates low. It would buy bonds and add to their balance sheet – which helped keep the yields lower. However, the Federal Reserve changed directions starting in 2017 and was “unwinding” its balance sheet by implementing a plan to steadily reduce its re-purchase of US bonds – thereby removing a big bond buyer/investor from the market.
As the economy is growing at its brisk pace above the target growth rate, the Federal Reserve must be sure to act to ensure the economy does not become over-heated and have “excess” inflation take hold. Inflation barometers come from many indexes the government analyzes so the calculation of inflation is in constant review by the Federal Reserve Board members.
High inflation is a bad word in the financial world as it brings costlier goods/products and higher interest rates. In its current mindset, the Federal Reserve is expected to continue its rate hikes on the Fed Funds rate. A 0.25% rate hike in December 2018 and at least two more in 2019 are expected bringing the Fed Funds rate to 3%.
What are rates now?
Current estimated rates* with no discount fees (11/7/18) for borrower’s with good credit and income are in the low 5% range for conventional 30 year fixed rates, while FHA/VA 30 year fixed rates are in the high 4% range. Please note, available rates are dependent on specific borrower’s credit scores, credit history and debt-to-income analysis.
Where could mortgage interest rates be in one year?
Should the economy continue to keep its current pace and the Federal Reserve continue its projected rate hikes, it is not inconceivable to see rates 0.50% higher than today.
What does that mean?
For every $100,000 of a loan amount, the increase of 0.50% in interest rate means an additional monthly principal and interest payment (30 year fixed rate) of $30/month. Hence a $300,000 loan will be approximately $90/mo more.
Overall, although November elections may influence future domestic and economic policies, the impact to real estate and mortgage industries is not immediate. The path of each industry is fairly predictable – at the moment. Rates will continue to trend up as the economy continues at its expected pace.
* There are ways to lower your interest rate through discount points which could be partially or completely recovered by seller concessions, if available.
Ahead of Thanksgiving, one thing I think we can all be thankful for is the end the political ads and robo-calls. ☺
It would my pleasure to assist you with your mortgage needs. My promise to all my clients is to be honest with you, work hard for you and exceed your expectations. Please know my main function is to be your loan advisor and I look forward to speaking with you.
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